Resale of PV PPAs in India risky

According to new research, there is rising anxiety among photovoltaic project developers, who are looking to sell their power purchase agreements (PPAs) before even starting construction on their projects. The lack of experience of companies operating in photovoltaics has been cited as the main reason.

The October edition of the India Solar Compass, a quarterly market analysis report by Bridge to India, has analyzed the emerging market for the resale of PPAs in Gujarat, India.

It found that, as projects approach their deadlines for commissioning, with various projects yet to begin construction, there is rising anxiety amongst the developers, thus leading them to sell their PPAs.

"A number of developers are looking for buyers for their PPAs to make an exit from their projects before even starting on construction," stated Tobias Engelmeier, managing director of Bridge to India.

The market

As per the traditional contract, a PPA cannot be transferred to a third party for a period of five years from the date of the commissioning of a project. However, if the project is developed under the name of the company that has signed the PPA, a third party can develop the project by acquiring the same company.

According to Bridge to Indias analysis, so far the criteria for the selection of the developers appears to have been compromised, since many of the projects have been allocated to companies lacking prior experience in photovoltaic project execution or collaborations with technology providers.

Although such developers have signed PPAs with the state utility, they may not intend to move ahead with their projects. These projects have been acquired under Special Purpose Vehicles (SPVs) backed by cash-rich traders, merchants and a few small-scale industrialists.

The India Solar Compass explains that buyers are exploring this option as there have been no projects available in the market in 2011 so far. According to the analysis, a significant motivation for buyers exercising this option is to be able to set foot in the Indian market.

The cost incurred to acquire these projects is large when compared to the capital cost of a photovoltaic plant (10 percent of the capital cost for a photovoltaic plant). However, various companies see it as a necessity in order to execute a project in the early phases of the Indian photovoltaic market.

Prices

For projects being resold in Gujarat, the price of a PPA is typically determined by the amount equal to the costs incurred by the seller in acquiring the project, plus a premium over and above the costs. The premium is purely market based and hence, negotiable.

According to Bridge to India, the extent of such negotiations depends on the location of the project and its viability. Many developers offer further project development support after selling the PPA. This could be in the form of acquiring land or obtaining the necessary clearances from the utility, the industrial commissioner and the local municipal body. Such services, says the India Solar Compass, can prove useful for foreign developers unfamiliar with the procedures involved in dealing with the state bureaucracy.

Risks

The analysis also highlights that the buying of PPAs is risky, as the role of the developer is kept hidden from the government until the complete transfer of ownership after five years. Also, a large part of this transaction – more than 50 percent – is typically paid in cash and, hence, is unaccounted for. Although the risk is greater for the party selling the PPA, any such transaction which goes unstated can raise questions on a companys balance sheets.

According to Bridge to India, a bigger risk is in the fact that the Share Purchase Agreement might not be recognized by the Indian judicial system. It is unclear if the Indian law recognizes the freedom to contract involving transfer of shares. "The situation can turn tricky for the buyer in case the seller refuses to transfer shares at a later stage," says Mohit Anand, solar expert for Bridge to India.

Bridge to India is an international consulting company with a focus on the Indian PV market. Founded in 2008, the company provides market analysis and market entry advisory to international solar companies looking to enter the Indian market.

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